The banking regulations and reforms after the credit crunch took time to adjust to. Cashfloat observes the changes and their effect.
Story highlights
- Banking Regulations and Reforms after the Credit Crunch
- Taxpayer’s money saved the bank at risk.
How Did Banking Regulations Change after the Credit Crunch?
Following the government bailout of UK banks, they put stricter regulations in place to prevent a repeated financial collapse. In the aftermath of the crisis, many criticised banking regulators’ overall understanding of risk. They pointed to their reckless lending decisions as a significant cause of the financial collapse. These bankers only had disaster plans in place to prevent one institution from failing. They did not foresee a situation in which more than one bank would collapse.
Using Taxpayers’ Money
The government used taxpayers’ money to save the banks on the brink of collapse. This angered the public who were concerned about bonuses for bankers exposed as risk-takers. Taxpayers were incensed to see their money dedicated to bailing out bankers they felt were solely concerned with making profits for shareholders. Many blamed the bankers for causing the financial crisis by mismanaging their banks. Furthermore, they had lost faith in banks as safe institutions where ordinary people could place their money without fear or worry.
The new regulations imposed stricter low-risk guidelines for banks to prevent another systematic collapse. The regulations also reflected the voice of the people who were calling for banks to take responsibility. The changes would ensure that bank bosses were fully accountable and that a crisis of this magnitude would not happen again.
Bankers Bonuses and Pay
The crunch for bankers came when the press revealed that they had been ‘paid for failure‘. That is, the government paid off the CEOs with handsome golden handshakes. This angered taxpayers.
So, by December 2010, European regulators imposed strict criteria about the bonuses that banks could dish out to their staff. The guidelines were not strictly obligatory. They were harsher than those organised by the G20 countries. However, the FSA in the UK and their European counterparts implemented them. Some raised doubts about drastically reducing cash bonuses. They felt that this could lead bankers to leave for countries with looser regulations. The British Bankers Association indicated that it thought these dramatic changes would impact appointing the best man for the job. The organisation feared that the UK would get mediocre heads of banks less qualified than those going to countries with fewer regulations.
The guidelines specified that only between 20% and 30% of a bonus could be paid in cash. This change to the bonus culture marked the end of an era when the best bank performers could demand a pay raise by threatening to leave and go to a rival business. One of the new rules stated that a banker who left in the middle of a contract would forfeit a year of their bonus.
When and Where Rules were Implemented
The British Bankers Association (BBA) wanted the new rules to apply to global banking so that British banks could retain their best people. Experts felt that as banks all over the world were under extreme pressure to achieve better capital balances, this new rule would allow them to save money.
The new rules targeted the corruption and boardroom bonus culture in UK banks. They included a recommendation for an independent committee to oversee salaries for each bank, and delaying bonuses. Banks would defer up to 60% of annual bonuses for employees between three and five years and pay half the bonus in shares. In addition, there would be a maximum level for bonuses, calculated as a percentage of the bankers’ basic salary.
Many people wanted to end the culture of ‘reward for failure,’ eliminating severance packages with these elements. Finally, they demanded transparency for senior management salaries.
The UK implemented the new rules on 1st January 2011. This affected bonuses that the government were due to pay immediately. People working for Non-European banks were only affected when they worked for subsidiaries in banks in the EU.
Stress Tests Introduced for European Banks
Additional banking reforms after the credit crunch suggested that all European banks undergo stress tests to determine how much capital was needed to prevent future losses on investments. There was also a call to recapitalise banks so that sovereign debt would not start another banking collapse.
In the next chapter, we discuss the bank levy and further safety measures.
